Monday, April 30, 2012

Montana Horse Racing Path Forward (Part 2 of 2)

Following up from Part 1, this post describes what Montana racing can do given its current fiscal predicament.  To recap, the Montana Board of Horse Racing has a large debt to service and currently two paltry revenue streams.  Simulcast has been shut down and it will take capital to infuse into that option in order to restart.  Even after that is done, the revenue generated will likely be smaller than what had existed before due to the lack of tracks to wager, to include lack of all the Triple Crown races.

Lots of debt and mediocre income or even income potential - what to do?  Well the Board as well as its Advisory Council had great ideas!  Here they are:

The Business Advisory Council's final recommendation (of three) was "maximize funding sources."  (the other two recommendations were in essence to set a budget and pay their debt)

The Board of Horse Racing's recent minutes had this item, "look at other income sources that will bring in income without large setup costs."

All I can say  If they keep going the way they are, in my opinion Montana racing is toast.  That would be a shame.

But there is something that is a new income source and doesn't have large setup costs!  What is it?  Really simple.  Implement pari-mutuel fantasy sports wagering in alignment with what was authorized under HB 616.  It can use the existing tote equipment and there isn't a requirement of an upfront payment that the various tracks are demanding for their signal.  It is a game based on professional sports, so what can/can't be done with regard to horse betting is irrelevant to this revenue stream.  It meets exactly what the Business Advisory Council and the Board of Horse Racing identified as an income source.

There are two issues - the game authorized under HB 616 is covered by patent and the revenue breakouts per HB 616 may not be aligned right to keep all stakeholders happy.  There's an easy fix.  The stakeholders (Board of Horse Racing, patent holder, pari-mutuel provider and retail outlets) need to agree on the takeout for each entity, and then the parties by contract will adapt the HB 616 takeout.  Again, easy fix.  With approximately a 26% takeout in total per HB 616, there's enough of the takeout pie to go around.

By implementing HB 616-compliant pari-mutuel fantasy sports, the Board of Horse Racing will get additional revenue which it can use to pay debt and get simulcast restarted, adding that revenue stream.  These new combined revenues should put the Board on a more solid footing to dig themselves out of their financial hole as well as begin to revive live racing in the state.

If they don't follow this approach, do not be surprised if racing in Montana will be put out of its misery to the anguish of those that put their faith in the Board of Horse Racing to do the right thing.

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Saturday, April 28, 2012

Montana Horse Racing Continued Trouble (Part 1 of 2)

As discussed in a January 2012 post, horse racing in Montana is in very dire straits.  Due to mismanagement by the Board of Horse Racing, the Board ran up an operating deficit somewhere in the $500,000 to $600,000 range, depending on the current state of the financial audit.  Simulcast operations have been shut down since the end of last year.  Multiple board members have been replaced, and both the Board's Executive Secretary and legal counsel have been released.  Those are positive moves, but are these moves too late?  Possibly.

There are those that are still attempting to revive things and repair the damage.  A former simulcast outlet is attempting to restart operations, but is having trouble due to previous unpaid bills.  Tracks that are owed money by the Board of Horse Racing aren't willing to send signals to the new simulcast operation until they are paid, and in some cases are demanding upfront deposits to ensure they maintain a positive account balance with regard to Montana.

A story in the Missoulian describes the situation.  The current board chairman is quoted that he was informed that Churchill Downs "don't trust Montana at at all" as they declined to allow signals to Montana for the Kentucky Derby.  Similar rejections were mentioned in the article with regard to carrying the Belmont Stakes.

The Triple Crown races are some of the biggest betting days for racing each year, so missing out on those will have a material impact on any full-year measure of handle, assuming simulcast operations in Montana ever restart.  A more recent story in the Montana Watchdog confirms the loss of the Kentucky Derby this year to any revived Montana simulcast.  This does not mean that Montanans can't wager on the Derby, as they can use previously licensed Advance Deposit Wagering (ADW) outlets and wager online.  There just won't be the ability for off track betting (OTB) sites to have wagering.

The existence of the ADW option is a problem for simulcast, even if they could restart operations.  Why would a person travel to an OTB to place a wager if they can have an equal or greater amount of tracks/races to choose from with an ADW and wager online from home?  The OTB has to provide an experience that is superior or an experience that can only be had at the OTB.  Limiting the experience to horse and dog racing wagers isn't going to do the trick.  I find it unlikely that even if simulcast is revived, that the wagering handle will amount to very much.  Examining the minutes of previous board meetings, simulcast was losing customers to ADW competition.

To help the Board of Horse Racing retire its debt and to provide funds for its operation as well as support live racing meets in the state, they're going to need much more money than is being provided by its only remaining revenue streams - ADW and the Lottery-run fantasy sports game.  The revenues from those sources may not even be enough to meet their annual debt repayment plan.  Where is the Board going to get the money needed to pay the deposits now required to allow simulcast to restart operations and cover their initial startup costs?  We're not even thinking about where the money is going to come from to support live race meets.  Too much debt, paltry current revenue and a simulcast operation that won't provide a superior alternative to existing ADWs is a bad combination.

With regard to the Lottery-run fantasy game, there is a danger.  That danger was highlighted by the Audit Division of the Montana Legislature.  Their finding was that the fantasy sports game as currently run was outside of statute, thereby illegal.  Given that finding, it could be possible that bettors that lost money playing that game could sue to get their money back.  If so, then the revenues counted on to pay back debts may be in jeopardy.  The post on that audit can be found here.

I don't see Montana horse racing digging out of this mess if current efforts continue.  Is there another potential path forward?  That possibility will be discussed in Part 2 of this post, which can be viewed here.

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Sunday, April 22, 2012

Expansion of Online Gambling in USA Will Lead with Poker

Casino Journal magazine discussed the efforts to exploit online poker as a lead product in the establishment of the regulated internet gaming market in the US.  The article was part of the April 2012 issue.  With the recent DOJ policy change on online gambling's coverage under the Wire Act, which I posted on here, poker is going to follow the expansion of internet lottery as state lotteries are already expanding their operations online.

The Innovation Group published an estimate of historical and projected growth of online gambling in the US that was published along with the article.  The chart is below:

Source:  Doocey, P. (2012, April) Chipping AWAY, Casino Journal, 20-27, and The Innovation Group.
They are estimating a growth rate of over 29% given liberalization in the US.  I don't know if that growth rate can be achieved, but if those numbers are simply a return to what used to occur (or would have occurred) in the US if the UIGEA did not exist, then perhaps yes, these numbers are reasonable.  My view is that the growth rate will be lower for two reasons:
  1. Liberalization will take a longer time coming than anticipated, and
  2. The economic recovery will continue to be very slow and lethargic.
Even if the growth rate is on the order of 15% per year starting from a baseline of $4.3 billion in 2012, that would result in a number in 2017 of $8.6 billion.  That is almost double the 2012 projection, but well short of the chart's estimate of $15.6 billion.

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Thursday, April 5, 2012

US Department of Justice Changes Stance Regarding Online Gambling

This major change from the US Department of Justice (DOJ) came out just before Christmas last year, but it is important to review just how big that change was. What the DOJ declared in its new opinion was that it practically reversed itself with regard to its position that all online gambling was illegal pursuant to the Wire Act. Its new position is much more rational and based on the law, which is that the Wire Act prohibits interstate sports betting.

Now the Interstate Horseracing Act took care of the issue with horse race wagering, but the prohibition on interstate betting on other sports is still in place. As an aside, interstate betting on dog racing also uses the Interstate Horseracing Act as authorization, but I don't think dog racing was specifically mentioned as an authorized activity. However, no one has been called to account for accepting wagers on dog races across state lines as far as I know.

What does this new opinion do? This opinion really benefits the states and allows them to offer things like internet poker and casino games within their states as the risk of inadvertent communications moving across a state boundary is no longer a legal threat. For the states specifically, the gambling game that is going to be exploited right away is lottery. Interstate lottery ticket sales are going to expand. After that, intrastate internet gambling on poker and casino games will come online, then those games will expand to interstate operations.

The window for Congress to have some federal control of activity historically the province of the states has passed, with the exception of sports betting. That also may be something that will come to an end with the recent passage of a sports betting bill in New Jersey, setting up a potential legal challenge to the federal Professional and Amateur Sports Protection Act (PASPA), which prohibits sports betting in all states but a grandfathered few. Professor Nelson Rose has a great view of the constitutionality of PASPA. He states, "I expect courts will strike down PASPA. Imagine a federal law that allowed only some states to have movie theaters with sound - it just wouldn't hold up." [1]

Now could a new administration reverse this DOJ opinion? Sure, but I don't think so. If states are moving forward with their efforts to expand gambling as a means of raising tax revenues, it would be politically difficult for a new administration to stamp out that activity without leaning on a very weak read of the Wire Act and facing off against multiple states in federal court. Once the horse has left the barn, not easy to get it back in.

Internet gambling is coming to the US, led by the states on a state by state basis. It's about time.


[1] Rose, I. (2012, February), DOJ Says States Can Legalize Internet Gambling, Casino Enterprise Management, 31.


Rose, I. (2012, February), DOJ Says States Can Legalize Internet Gambling, Casino Enterprise Management, 30-31.

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